The silent revolution
ough the Chancellor of the Exchequer's tation as the Government's golden boy finally vanished beyond recall as a result e events of the past ten days, Mr Jenkins ast deserves credit for having admitted to nation that his deflationary mini-budget decided on before the international mone- crisis blew up. And now the National tute of Economic and Social Research come out with forecasts, prepared before the monetary crisis and Mr Jenkins's t measures, suggesting a balance of pay- ts deficit of over £700 million this year of nearly £100 million next year. Only months ago the NIESR was still fore- g a £200 million surplus for 1969. ly, something has gone badly amiss— equally plainly, there are no scapegoats found in either Paris or Bonn. What one wrong?
rt of the answer has been clear all along. devaluation to have a chance of working, s essential that there should be a simul-/ us and substantial deflation of home de- . The domestic measures that accom- d last November's devaluation were ly regarded as inadequate, even at the yet when the new Chancellor came to y this in January his package consisted fal cuts in the public sector and no at all on consumer spending. Mr Jen- us allowed a wild spending spree to in front of his April budget—a spree further encouraged by dire warnings t that budget would contain—and yet hen Budget-day came he refused to ny use of hire-purchase controls, the ick-acting regulator to hand. Hence m at home which has sucked in im- ports and eaten into the capacity available for exports.
Each and every one of these errors by Mr Jenkins (and his predecessor) was pointed out in this journal as he made them; as, too, was the unbelievable folly of accompanying the November devaluation with the abolition of the Treasury's export rebate.
But with the benefit of hindsight one can also discern a further cause of the present debacle, which threatens to undo so much of the good that devaluation has already done— and ought to continue to do—for British ex- ports. The plain truth is that in a (by world standards) wealthy nation like Britain, no government can in normal conditions make a tough consumer squeeze work if the public are determined for it not to work. This is not simply because tax increases are automatic- ally cancelled out by wage increases : that does not happen instantaneously, nor always fully. More important is that consumers have, if they need it, a cushion of savings on which they can fall back if they want to, and use to maintain the rising standard of living to which they are accustomed. Quite apart from stock exchange securities, the total of cash, bank deposits, money with building societies and in national savings alone amounts to more than £30,000 million.
A squeeze on consumer spending can there- fore work only if the spending classes (which means most people) feel either that there is a real incentive for them at best to save and at worst not to eat into their existing savings, or else that it is worth while deferring purchases until purchase tax and all the other taxes come down again. Neither of these conditions any longer exists. Rapidly rising prices and higher direct taxation have gradually sapped the will to save; while the conviction that, under Labour, taxation can move in only one direction—upward—means that each increase in, purchase tax or excise duties acts as a re- minder to buy before these taxes go up again. Hence what Mr Heath aptly described in Monday's economic debate as a silent revolu- tion. And it is a revolution that has been all the more determined because what Mr Jen- kins was attempting in his April budget was not merely a damping down of the boom, but an, actual drop in personal living standards. Here was something which the consumer was not prepared to put up with. Nor has he.
But this silent revolution not only helps to explain why Mr Jenkins's earlier plans have gone so badly wrong. It also raises serious doubts about the likely success of the measures he has announced to get the economy back on course, centring as they do round a further £150 million of indirect taxa- tion. And just as increased consumer taxes are nowadays seen merely as the prelude to still higher rates of tax, and still higher prices in the shops, rather than as a reason for de- ferring a purchase, so there must be grave doubts, in the present climate, about the Chancellor's new weapon, the system of prior deposits for imports. Quite apart from the danger of retaliation by other countries, its effect on the level of imports is highly uncer- tain and could well (in a country with a credit system as sophisticated as Britain's) prove very small indeed (not to mention the per- verse effect of the embarrassing hiatus before it becomes law). This is why the Treasury has been fighting against its introduction for the best part of two years, in the face of its deter- mined advocacy by Lord Balogh and others. But now that it has been introduced, if the effect on the import bill is not quickly 'appar- ent, importers will conclude that the Govern- ment has now taken the first step down the slippery slope to full-scale import controls, and the rush to forestall this—which has al- ready added significantly to this year's trade gap—will resume on a still larger scale.
So what now? Even at this late stage, the Chancellor would be well advised to drop the proposed prior deposit scheme for imports and reintroduce the export rebate in its place. The rush out of savings must be stemmed, in so far as it can be, by the introduction of a worth-while tax incentive scheme for regular contractual savings.
But most important of all, the Chan- cellor needs to take a leaf from General de Gaulle's book and prune drastically almost all forms of government expenditure. A move in this direction is indicated anyway by the fact that, over the four years that the presetit Government has been in office, government expenditure on goods and services has been increasing, year in. year out, exactly twice as fast as ordinary consumer spending. (Government expenditure on grants and sub- sidies has been rising considerably faster still.) But the consumers' silent revolution' has made it essential. Spending at home has got to be brought under control. Since the Chancellor has lost control of the private purse, it is the public purse that will have to feel the pinch. This may be unpalatable to a Labour government. But there is no other way. Or, rather, there is only one other way —and this is (or certainly ought to be) far more unpalatable: the deliberate creation, by whatever measures are most convenient, of a really sharp increase in unemployment, so as to scare the public into saving instead of spending.
The present Government began its career by crying such stinking fish about the Tories economic legicy that it destroyed forehni confidence in sterling; and thanks to Midi has happened since that confidence has still not recovered. But the Government has now allowed something far worse to happen: it has gone far towards destroying the con- fidence of the people of this country in the pounds in their pocket. This confidence must be restored—not least because, if it is not, economic management becomes totally im- possible. That is the Chancellor's over- riding problem at the present time. The international monetary crisis, about which he alone can do little, is merely an added com- plication. But it is to this that we now turn.
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